Nigeria: Will oil ever return to $120 per barrel?

Many events contributed to the increase in oil prices that characterised 2006 to 2009, and those events occurred in quick succession. The events include the PDVSA workers’ strike in Venezuela and the anticipation of war in Iran in 2006, which alone increased the price of oil to a little above $60 per barrel. The bad weather created by the movement of Hurricane Ivan in the Gulf of Mexico also drove the price close to$65 per barrel. These increases in the price of oil were as a result of cuts in output, arising from intervening events of natural consequences. The inventory adjustment brought the price down again to$55 per barrel. Further adjustment in price was again accelerated by market forces, which was encouraged by Hurricanes Dennis, Katrina and Rita in the Gulf of Mexico. By this time, the price of oil had moved to well over $82 per barrel. So in 2008, Nigeria was making more money from the increase in the price of oil.

Even though the season of hurricanes did not last for more than one year, the effect on the price of oil was significant, as it moved from$80 dollars per barrel to over $100 dollars per barrel. This was more than the cumulative gain in price increase in the last five years!

In 2007 and 2008, Nigeria experienced challenges in meeting the allocation of supply to the international market. This cut in output significantly led again to further increase in the price of oil. It moved to a little above $120. Again, rising demand in spite of the cut in the output of Nigerian oil, low spare capacity and weak international currency (arising from the bailout policy of the American Government in the management of the economy during the 2009 recession) made the price of oil to reach the peak of over $120.

In 2009, the economic recession manifested to such an extent that the signals created in 2008 become reality. The reality was that the recession would stay longer than necessary. The price of oil began to drop with geometric progression as a result of no cut in output combined with weak currency.

The US dollar fell against all other currencies. The Pound lost considerable value against all other currencies. Interest rate came down to l% in the US and 0.5% in England. Economic policies introduced in both countries were very competitive. For instance, in America, there were major job losses and government was interested in the protection of jobs. The introduction of the bailout policy became handy and there were potential demands in the hands of the government from major companies that required urgent attention. The Federal Reserve Bank had to make major decisions in creating more money by printing.

Ford Motors, for instance, needed about one trillion dollars or face liquidation, while A & G Insurance needed about half a trillion dollars in a matter of days. The American government resorted to printing more money, and about two to three trillion was printed as additional money to arrest the situation.

The fact that the home equity line of credit became due was also a critical challenge to economic recovery. Several trillions of dollars were trapped with the home equity line of credit. And with the value of property coming down in addition to the loss of jobs and the near collapse of the capital market, the various Central Banks had a huge task at hand in working a way out of the crises. The cumulative effect was the sharp drop in oil prices in the international market, which cumulated into almost thirty years loss of already gained prices. For instance, what was already over $120 per barrel fell to $40 dollars in less than five years. That was the price of oil in 1984!

In England, the situation was not better than what was happening in America, as the interest rate came down to 0.5% and the government had to introduce qualitative easing as a way of managing the economy. More money was printed and deposited in banks to prevent systemic failure arising from liquidity crises in the banks. The policy was majorly to protect the banks from failure. Again, a whooping sum running into several billions of pounds was spent on buying toxic assets of the banks by the Bank of England. Generally the price of oil in the international market dropped.

Positive movement in the price of oil was noticed again in 2010 after the downward movement of 2009. Prices started moving from $40 per barrel geometrically to as much as $62 per barrel in 2010. The acceleration in prices during this period was a function of the Arab spring. Weather condition also played a significant role in price increase. Most countries, including Nigeria, had improved on output, thereby benefiting from the accelerated price increase. The situation was further improved with price adjustment by the Iran sanction, which created heavy demand for a rather scarce product.

Between 2011 and 2012, the price of oil moved upward to close to $100 per barrel. With strategic thinking and innovation, counties like Nigeria could have laid a good foundation for better days ahead.

The movement in the price of oil was not sudden, such that there was no sufficient time for planning. It was not enough to look into distribution of surplus income without connecting the future. For instance, only a few days ago, the Saudi Arabian government in anticipation of further depletion in oil prices released a whopping sum of 780 billion dollars from the reserve to support fluctuating oil prices.

Another economist grasping for an understanding of current events with his normal BAUtopian econ 101 tools. The reality is the foundational elements of BAU mainly the oil complex and the financial system are at limits and diminishing returns. This is manifesting itself currently with demand and supply destruction. If any of you here want to claim the current glut is only a supply phenomenon then please explain why interest rates are at zero or negative. Please explain massive debt and deflation. Please explain sovereign nations that can’t meet their obligation both in the bond markets and unfunded liabilities.

Nigeria is a failed state in the making. What could be worse than vast population overshoot with continued population growth? A mega urban capital city that is imploding from vast slums of cancerous growth. Top the cake with the icing of ethnic and religious strife. Nigeria is a mess and a danger to BAU because Nigerian oil is high quality and conventional. Nigeria may shape up to be another Libya. Both countries have high quality conventional crude BAU so desperately needs. Both countries have unstable above ground PO dynamics threatening to take this high quality oil off market.

BobInget on Sat, 21st Feb 2015 10:50 am

In several oil and gas chat rooms where I ease-drop, we read posts by oil workers who as much as big bucks temp, wife, girl-friends, mothers stand firm.. “Go to work in Nigeria or (xxx) and I won’t be here (if) you come home”.

In Venezuela, pay is so low even Venezuelans won’t work in domestic oil fields.

The same holds true in Mexico.

Government stooges siphon off profits
that should be plowed back into finding and developing more oil.

Losing one’s head over high paid jobs in Iraq
is not a risk most men over 30 are willing to take.

Despite all the high and low toned rhetoric
it’s obvious to most we are verging on continuing chapters ‘oil wars without end’ in North Africa and the Middle East.

If the US were to send troops to every oil soaked nation in conflict, ‘protecting’ our
vital interests, we could empty the US of
armed forces.

While President O says we are not fighting
“islamic radicalism” we really are.

How much longer oil prices can be kept in check with propaganda alone will be studied in class-rooms for decades.

Two things certain.

1) World Wars cannot be fought without
millions of barrels per day of oil that otherwise have gone to the civil sector.
(shortages, inevitably show)

2) Conversion to a lower use carbon economy will take enough oil, gas and coal
to kill us all.

Plantagenet on Sat, 21st Feb 2015 10:53 am

@Daver You are absolutely right that Nigeria is a mess in the making. But I wouldn’t compare them to Libya—after all, Libya had its stable government bombed into obliiviion by the US four years ago, but luckily for Nigeria obama has shown no signs of moving to bomb the government of Nigeria into oblivion as well.

redpill on Sun, 22nd Feb 2015 6:58 pm

Well, just to comment on the author’s #’s for the auto bailout, of which I believe Ford needed $0.00:

This is from Dec.2014

“According to The Detroit News, the government’s books actually show an official loss on the auto bailouts of $16.56 billion. The difference is because the larger figure does not include the interest or dividends paid by the borrowers on the amount lent. While it’s easy to see fault in any red ink on the Feds’ massive investment, the number is less than some earlier estimates. At one time, deficits around $44 billion were thought possible, and another put things at a $20.3 billion loss.

Outside of just the government losing money, the bailouts might have helped the overall economy. A study from the Center for Automotive Research last year estimated that the program saved 2.6 million jobs and about $284.4 billion in personal wealth. It also indicated that the Feds’ reduction in income tax revenue alone from Chrysler and GM going under could have been around $100 billion for just 2009 and 2010, significantly more than any loss in the bailout.”